In our “Cryptopedia”, you will find a reference for learning about a broad range of cryptocurrencies. First, we must begin with the basics and the most important blockchain cryptocurrency of all: Bitcoin.
To begin to understand Bitcoin, we must first learn a little bit about its history, starting with its mysterious origins as the creation of an unknown person or group of people named Satoshi Nakamoto.
In the world of blockchain technology, no other name has the level of familiarity and enigma as Satoshi Nakamoto. In fact, it is not even known whether Satoshi is a man or woman, an individual or a group of developers. Still, the influence that Satoshi had as the creator of Bitcoin can not be overlooked.
The year was 2008. The economy was experiencing a collapse that was devastating for workers and families around the world. Yet, those responsible for the collapse remained unscathed despite their malevolent actions, being “bailed out” by the masses who lost jobs, savings, and secure financial futures.
It was in this tumultuous economic period that Satoshi Nakamoto was inspired to create a solution to a corrupt economic system that was manipulated by those with greedy motivations for their own personal benefit, at the expense of all others. A global currency could be created that took advantage of greed, or the profit motive, as a tool to ensure financial security and to remove concentrated power from a few elite players. This currency would not depend on any single central bank, any small group of financiers, or any military power. Instead, it would be entirely decentralized — overlooked by anyone who cared to look via an open ledger, visible for all via the Internet.
Satoshi Nakamoto created Bitcoin, wrote the first cryptocurrency white paper, and launched the first blockchain database as a response to the economic problems of the era. It was 2009 when Bitcoin was finally launched as a “Peer-to-Peer Electronic Cash System” to counter the flaws of the fractional reserve system which is at the root of the economic problem of inflation. Beginning with a genesis block in 2009, Satoshi Nakamoto began the mining process of Bitcoin, rewarding the miner with 50 Bitcoins to begin. Initially, of course, this would have been mined by Satoshi, and addresses attributed to the creator can be seen to this day that currently store around a million Bitcoins from these early days.
Bitcoin has grown into a worldwide phenomenon that continues to dominate the cryptocurrency market and is the most trusted electronic cash currency. Little is known, on the other hand, about who exactly Satoshi Nakamoto actually is. Originally claiming to be a Japanese male, 37 years-old at the time, many dispute this possibility due to the perfect English writing of Satoshi’s documents and the lack of Japanese in any documentation or labeling. Some British references in expressions and colloquialisms indicate Satoshi might instead be a British individual.
Regardless of Satoshi Nakamoto’s identity, it is clear that this individual or group of individuals had a great impact on the world to an extent which may not yet be fully understood.
So what is Bitcoin?
It is not easy to sum up what Bitcoin is in simple terms. Put as simply as possible, however, it is a digital ledger of account that is shared with anyone and everyone who participates in its network. It is not saved or controlled by any single individual or small group of individuals as it is instead distributed as an exact copy of a record of accounts for every individual node or participant on the network to see. This copy of information consists of a series of blocks that are confirmed by the participants on the network, which is why it is referred to as blockchain technology. For a little more detailed explanation of blockchain technology, take some time to read this article.
Instead of trusting any particular party to be honest or careful with transactions of information or money, Bitcoin works by using participants on the network to confirm all transactions. These participants, called miners, are paid for their efforts with block rewards — basically a block of Bitcoin is generated for them as a prize — for ensuring truth through consensus. It takes an enormous amount of computational power and electricity to perform the necessary calculations to cryptographically solve puzzles that are used as a competitive reward mechanism. This reward system encourages truthful confirmations.
The cost of doing these calculations is so great, in fact, that it would cost miners more computational power and energy to be dishonest, so it’s just not worth trying, usually. For more information about how this mining process works, take a look at our series on ASICs versus GPUs.
Bitcoin is a revolutionary technology in that it removes the center. Up until the advent of blockchain technology, all data was stored in some central form, whether it be on a flash drive in your pocket or on giant servers in Manhattan office buildings. Problem being, if that flash drive fails or the server is hacked or loses power for whatever reason, information is compromised. All centralized data storage solutions are vulnerable to a central point of failure of some sort.
In this sense, Bitcoin operates more like the DNA in the cells of a living organism, in that each and every cell has the same information distributed throughout the body. This revolutionizes digital information and the ability to store data in such a way that it cannot be counterfeited or altered without agreement from the network. This also enables Bitcoin to act as hard money, like gold, because it cannot be duplicated and is inherently scarce. Even so, it has advantages that even gold does not enjoy. It is infinitely more portable, being digital, and cannot be confiscated since it is stored in a distributed fashion and thus cannot be shut down or cut off.
It’s difficult to express just how revolutionary this technology could be. But I suppose that’s part of what is so interesting about it.
Want to learn more? The next installment in The New Paper’s Cryptopedia examines Ethereum.